Sunday, February 13, 2011

Week in Review-Feb 11th

It was a tough week for the carry trader. The markets started out acquiring higher yields driven by solid global growth and seasonality in the carry and momentum strategies. By weekâs end, the dollar is broadly firmer, as popular carry trades continue to correct lower. There is no obvious macro driver for that move.Thrown in the concerns about Egypt, the PBOCâs decision to fix USDCNY higher, cautious comments from RBAâs Stevens and a BOK leaving rates on hold are seemingly weighing on global sentiment. Letâs not forget the Euro-peripheries, Portugal is back on the radar. Below, we have some of the highlights of the week.

EUROPE

Cold weather took a toll on German factory orders in Dec. Orders declined -3.4%, m/m, well south of the consensus forecast at -1.5%. However, this can be partly attributed to cold weather and also to a base effect from the very strong +5.2% gain reported in Nov.

German IP came in weaker than expected at -1.5%, m/m in Dec. vs. +0.2% consensus forecast (-0.6% in Nov.). Again, the weakness can be attributed to exceptionally cold weather. In the 4th Q combined, IP still rose a solid +0.8%, q/q.

Bundesbank President Weber will drop out of the race to succeed ECB President Trichet in October. Weber was considered the front-runner, and his departure throws the field wide open. Weber is considered a hawk.

The UK trade deficit reached a new record high in Dec., with the deficit increasing to Â£9.2b (vs Â£8.6b expected). However, again, cold weather is to be blamed. On the positive side, last monthâs trade balance was revised to Â£8.4b from Â£8.7b.

UK industrial production for Dec. came in line with expectations. IP advanced +0.5%, m/m, after a +0.6% print in Nov. (revised up from +0.4%). The result is respectable considering the weakness in services and construction due to cold weather, but the growth was concentrated in the utilities sector. Manufacturing production declined -0.1%. The BOE left rates unchanged as expected (+0.5%). The market is pricing in a hike as early as May.

Swiss CPI fell -0.4%, m/m in Jan. despite a Jan VAT hike. As a result, headline inflation fell to +0.3%, y/y from +0.5%, y/y in Dec., much weaker than the consensus forecast of +0.6%, y/y.

Americas

Canadian monthly building permits rose in Dec. +2.4% vs. market expectation of +2%. It was the first in permits in three-months following a -10.5% decline in Dec and a -6.2% decline in Oct.

Treasuryâs $24b 10-year auction drew the most demand on record from a class of investors that includes central banks. Indirect bidders bought 71.3% of the notes, compared with 53.6% last month and an average of 46.4% for the past 10 sales.

Bernanke kept to âhisâ script and doused the hawkish comments of his colleagues, Lacker and Fischer who implied earlier this week that the Fed was nearing a change in course with QE2. Yesterdayâs statement indicates that helicopter Ben has a strong hold on the FOMC despite the âundercurrents of discontentâ. He stated that inflation was a problem overseas and not an issue in the US and believes that commodity prices will not undo a benign inflation environment. In translation, QE2 will run its course.

US weekly claims fell south of +400k. It managed to print a 30-month low (+383k vs. +419k) and extended its declines for a second consecutive week. Over the recent months initial jobless claims have been volatile, alternating between flirting with the +400k mark and adding +40-50k to those levels.

Federal Reserve Governor Kevin Warsh, who was one of Chairman Ben S. BernankeÂ´s closest financial-crisis advisers before becoming the only governor to question the expansion of record monetary stimulus in Nov., resigned after five years at the central bank. It should allow Obama to appoint another dove to the Board.

The dollar value of the US trade deficit came in line with expectations, widening to -$40.6b in Dec. from -$38.3b in the prior month. The underlying details were broadly stronger, with petroleum accounting for most of the widening.

Prelim UoM Consumer Sentiment advanced to 75.1 an eight-month high, a sign falling US unemployment and rising equity prices may be comforting consumers.

Canada posted its first trade surplus in 10-months in Dec., as energy and metals powered the biggest jump in exports in three-decades (+$3b vs. -$0.4b). The surplus with the US now sits at +$5.1b (the widest in two years). It seems that exports are holding up well to CAD appreciation thus far.

ASIA

Australian retail sales disappointed, advancing +0.2% over Christmas, after a revised +0.4% gain in Nov. The market had been expecting a +0.5% increase. Higher market interest rates was likely the main reason why consumers tightened their purse strings.

The Chinese central bank (PBOC) hiked its deposit and lending rates by +25bp, in response to prescient inflationary pressures. Analystâs believe their tightening will be front-loaded in order to quickly normalize policy. The market projects another +160bp of hikes in the one-year lending rate to +7.66% and another +175bp in the one-year lending rate to +4.75% by the end of 2011. This was only the second policy rate hike in this cycle, with PBOC preferring to hike commercial banksâ reserve requirement ratio (RRR) instead.

China has joined India, Indonesia, Thailand and South Korea in boosting interest rates this year as Asian policy makers seek to cool the economies leading a global rebound.

New Zealand Finance Minister English said that GDP may have contracted in the 4th Q as a result of higher-than-expected savings rates and weaker-than-expected consumption and housing market (release date is Mar. 24th). This should leave us with a more dovish RBNZ profile until at least the middle of this year. A stall in the economy should keep interest rate spreads moving against the NZD.

The Aussie has reacted negatively to the mixed employment data, forcing the liquidation of the weak long carry trades who have been influenced by the market pricing for RBA rate hikes over the next 12-months dropping. Total employment rose +24k in Jan., higher than the +17.5k expected, but part-time employment (+32K) accounted for the rise, with full-time employment down-8k.The unemployment rate was unchanged at +5.0 %

RBA Governor Stevens in his testimony to parliament that market pricing of no rate hikes until late this year was reasonable and that the RBA is ahead of âthe gameâ and can afford to stay on hold for the time being. Market pricing for rate hikes over the next 12-months fell 4bp to +34bp.